Tax tips: Fixing an IRA rollover mistake

Raphael Tulino is the spokesman for the IRS in the Orange County/San Diego area, and he's here to answer tax questions ....

Q. In 2009 we attempted to roll over my wife's traditional IRA with a large national bank. My wife went into the local bank branch and requested the rollover in person. The bank clerk did not follow through with the rollover at the time but instead said that a form would be sent for her to fill out.

This seemed strange but since the bank had taken over the bank where the IRA was previously held my wife assumed this was the new protocol. The bank clerk further complicated what should have been an easy rollover request by having a "distribution form" sent out instead. My wife signed the form because she thought this was required by the bank to complete the rollover.

The bank subsequently sent a check for the balance in the IRA, minus a 10% deduction. When my wife contacted them and reported they had sent the wrong amount, they apologized and sent a new check for the full amount.

Before she could deposit it they called and said that was a mistake and rescinded it. Another check was then sent for the smaller amount (original balance less 10%). When we tried to deposit that check into a new IRA at the same bank, they said they couldn't accept it because it was a distribution.

None of this made any sense. During all this time that incorrect checks were coming and going the 60-day period for rolling over an IRA had elapsed.

Subsequently we got a tax bill from the IRS for $27,000. The IRS would not accept our initial explanation that the problem was caused by the bank's mistakes and advised that our only recourse would be tax court. The amount from my wife's IRA has been in a savings account since 2009 and has not been touched since then. We did not need the money then because our income was high that year and it would have and did cause a tremendous tax liability for us.

Do we have any basis to get the IRS to allow us to return that money to an IRA, or will be forced to pay big time for the bank's error?

A. I'm sorry to hear about your situation here and I hope the information provided below is useful. An answer here however is going to depend on your specific and complete set of facts and circumstances. In fact, even if all the facts and circumstances were known, IRS would not offer an opinion in this type of forum. Also, you give no indication of time in correspondence (month/dates) with the IRS on this.

It sounds like you might want to request a waiver of the 60-day requirement, although this requires a letter ruling. (Note there is a fee for letter rulings.) However, depending on timing, the fact that this happened three years ago may or may not weigh in your favor. More information on waivers and requesting a letter ruling is on Page 22 of IRS Publication 590, Individual Retirement Arrangements.

In general, and from Publication 590:

“The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster or other event beyond your reasonable control.”

Finally, if you have not done so already, you may/most likely will find it beneficial to consult with a qualified tax professional on this.

Q. My mom and dad want to help pay for their granddaughter's college education now that they sold their business. My daughter is starting the 11th grade this year and my parents say the best way to do this with two years remaining before college is through something called a Qualified Tuition Plan. If there are any tax benefits to this, what are they?

A. A Qualified Tuition Plan (QTP) is also known as a 529 plan is named for the Internal Revenue Code it represents. The main tax benefit is that no tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses.

“States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You cannot deduct either payments or contributions to a QTP.”

Also, from Publication 970:

“Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors.”

Per the gift tax rules, and what your parents may be referring to, is the ability to make a sizable gift to a QTP (for a beneficiary). You can normally make a gift to anybody of up to $13,000 (in 2011 and in 2012) without having to file a gift tax return, but with a QTP, your parents can elect to make five years of annual gifts at once to a 529 plan. This is explained further in the instructions for IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. See Page 5.

Finally, this question is topical as the new college year begins. So as a reminder for grandparents, parents and students paying for higher education, consider all the tax benefits available to you by taking a look at IRS Publication 970 and perhaps by consulting with your bank, credit union or financial adviser.

Do you have general tax questions? Send them to moneymatters@ocregister.com. Include your name and a phone number where you can be contacted. They will not be published.

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